I have been using a combination of Daemon Tools and MagicDisc for Windows XP and Vista, but when upgrading to Windows 7 I found out that Daemon Tools no longer works. I did some quick research and found that a lot of other folks liked PowerISO. I downloaded it, installed it, and it works great. It also has shell integration which I always found to be a critical feature missing from Daemon Tools.
Permanent link to this article: http://ericsilva.org/2009/08/28/cddvd-emulation-on-windows-7/